BOJ October Rate Hike Expectations Intensify as Policy Shift Looms

Markets brace for monetary earthquake as Japan's central bank signals departure from negative rates.

The Yield Curve Control Endgame

Traders are pricing in what was unthinkable just months ago - the Bank of Japan finally normalizing policy after decades of stimulus. October's meeting now shapes up as the potential inflection point.

Inflation's Unwelcome Return

Persistent price pressures forced the BOJ's hand, with officials quietly testing market reactions behind the scenes. The era of free money might actually be ending.

The Global Ripple Effect

Watch for currency volatility and bond market tremors when Japan stops being the world's liquidity provider of last resort. Carry trades everywhere just got riskier.

Because nothing says 'stable monetary policy' like waiting until everyone's overleveraged to change the rules.

Internal hawkish momentum builds

The BOJ’s most recent meeting on September 19 reinforced this pivot. The board voted to maintain rates at 0.5%. However, two board members, Naoki Tamura and Hajime Takata, dissented for the first time since Governor Kazuo Ueda took office. Instead, they voted for an increase to 0.75%.

Analysts said the votes against were symbolic, indicating that hawkish sentiment is gaining sway inside the nine-member board. One alliance board member, Makoto Sakurai, said the dissent might be a coordinated signal of an approaching policy shift.

The bank said it would also take steps to shrink its holdings of exchange-traded funds (ETFs) and real-estate investment trusts (REITs). That was the first step in unwinding more than half a decade of asset purchases that had characterized an era of aggressive monetary easing.

Minutes of meetings released this week add to the picture. Some argued that the federal funds rate was below what would be expected to be neutral when inflation is high and the output gap is closing. That viewpoint indicates that even more members are preparing for action.

Sakurai, who left the BOJ in 2021, said policymakers could postpone a MOVE until December if they need clearer readings of the effect of U.S. tariffs. But he thinks that the overall trajectory points higher. He sees the policy rate rising as many as 100 basis points over the next two and a half years, reaching 1.5% before Ueda’s term expires in 2028.

LDP election could shape BOJ’s timing

Government leadership could also factor into the timing. Japan’s ruling Liberal Democratic Party (LDP) will hold its leadership election on October 4. The result could determine the mood for BOJ decisions.

One of the leading candidates, Sanae Takaichi, has been considered a supporter of easy-money policy. Last September, during a leadership contest she ultimately won, she said that a rate rise would be “absurd.” But her tone has tipped this year. She has said that the monetary tools should be left to the BOJ, while the government sets fiscal and economic direction.

Should Takaichi, or any other dovish contender, take the top job, it is possible that the BOJ will move cautiously in the NEAR term. Market watchers say the bank could postpone a hike to avoid looking at cross purposes with the incoming leadership.

Yet the BOJ is nominally independent. Its decision will be based on inflation, wage growth, and the wider outlook for trade and consumption.

Don’t just read crypto news. Understand it. Subscribe to our newsletter. It's free.